Tesco Plc’s Financial Statement Analysis

Chief Executive Officer’s Report to Stockholders

Financial Statement Analysis

Financial statement analysis of Tesco Plc helps investors or stockholders understand how their investments were used. The financial statement analysis also shows the dividend income that each stockholder earns. Austin Murphy (2000) emphasized, “A large number of different assets exist into which a saver can invest cash not currently needed, and investors must choose what combination best suits their needs. Because more money is considered to bring more happiness or utility, investors generally seek to maximize the return on their investments.”

Current Ratio

The current ratio displays Tesco’s capacity to pay all its currently maturing debts on time (Garrison & Noreen, 2003). A positive current ratio indicates the company is able to meet its short-term or current debt obligations. On the other hand, a negative current ratio shows the company will not be able to pay its currently maturing or short-term obligations. Consequently, a company that has a positive current ratio is in good financial health.

Tesco’s current ratio for 2012 is 1.93. The ratio is lower than the prior year’s 2.04 current ratio. The current ratio analysis shows an unfavorable picture of Tesco, in terms of the current ratio portion of the company’s financial statement ratio analysis. QUICK RATIO. The quick ratio, also known as the acid-test ratio, is one of the liquidity ratios.

The ratio shows how well the company will be able to pay its currently maturing obligations or debts. Consequently, a positive quick ratio shows the company is in good financial health. Tesco’s quick ratio for 2012 is 2.04. The ratio is lower than the prior year’s 1.48 quick ratio. Likewise, the quick ratio analysis indicates an unfavorable picture of Tesco, in terms of the current ratio portion of the company’s financial statement ratio analysis.

Return on Equity Ratio

The ratio, a profitability ratio, is one of the more significant profitability measures of the company. The ratio indicates the relationship between the company’s net income and the total amount of stockholders’ equity (Horngren, Sundem, & Stratton, 2005). The financial data shows that Tesco’s Return on Equity ratio for 2012 is similar to the prior year’s 0.16 return on equity ratio. Tesco should exert more efforts to increase its return on equity ratio.

Carroll Aby (1995) theorized, “Most holders of financial assets do not concentrate all of their resources into one type; rather they practice an asset allocation process. That is, a portion of the financial portfolio is made up of safe, liquid assets such as insured bank deposits, short-term Treasury securities, or money market funds.”

Gross Profit Ratio

The Gross profit ratio, a profitability ratio, shows the relationship between gross profit and the company’s net sales amount. The ratio indicates how much of every sales amount is available to pay for the company’s expenses as well as generate profits for the company. Tesco’s gross profit ratio for 2012 is 0.08. The ratio is similar to the prior year’s 0.08 gross profit ratio. The ratio indicates’ a favorable picture of Tesco, in terms of gross profit ratio analysis.

However, the company must strive to increase its gross profit ratio. To increase the gross profit ratio, Russell McCalley (1992) proposed, “The marketing process called channel management is forever changing as a company’s products and markets mature. Moreover, the interface with competitive channel managements may require unplanned, reactive channel actions. Policies, programs, products, prices, and people change frequently in the marketing channel.”

Net Profit Ratio

The Net profit ratio, a profitability ratio, indicates the relationship between net profit and the company’s generated net sales amount. The ratio shows the company’s profits after deducting the company’s expenses and costs of revenues. The net profit affects the company’s net cash flow computation. Tesco’s net profit ratio for 2012 is 0.04.

The ratio is the same as the prior year’s 0.04 net profit ratio. The ratio shows a similarly positive picture of Tesco, in terms of net profit ratio analysis. However, the company must strive to increase its gross profit ratio. To increase Tesco’s net profit, Tony Proctor (2000) emphasized, “Understanding a business in depth.. is based on detailed current information on sales, profits, costs, organizational structure, management style and other factors.”

Net Asset Turnover Ratio

The ratio shows the company’s capacity to maximize the company’s net assets to generate the net sales amount. A high ratio indicates there is a small investment amount. On the other hand, a low ratio shows the company is inefficiently managing its net assets, in terms of generating net revenues. A higher net asset turnover ratio proves Tesco uses the company’s net assets to generate the current year’s sales amount. The net profit affects the company’s net cash flow computation.

Tesco’s net asset turnover ratio for 2012 is 3.43. The ratio is lower than the prior year’s 3.67 net asset turnover ratio. The net asset turnover ratio analysis shows an unfavorable picture of Tesco, in terms of net asset turnover ratio analysis. The company must exert more effort to increase its net asset turnover ratio.

Fixed Asset Turnover Ratio

The ratio indicates the relationship between the company’s net sales and the company’s fixed assets. The ratio accounts for the company’s capacity to generate net revenues from the use of its fixed asset investments. The fixed asset investments include property, plant, and equipment assets. A higher fixed asset turnover ratio displays the sales effect of using the company’s fixed assets. Tesco’s fixed asset turnover ratio for 2012 is 1.61.

Again, the ratio is lower than the prior year’s 1.73 fixed asset turnover ratio. The fixed asset turnover ratio analysis shows a similar unfavorable picture of Tesco, in terms of the company’s fixed asset turnover ratio analysis. The company must double its efforts to increase its fixed asset turnover ratio.

Gearing Ratio

The ratio measures Tesco’s financial leverage. The leverage shows the degree to which the company’s operating activities are paid from the owner’s investments in relation to the creditors’ loan amounts (Peter & Eddie, 2008). The best gearing ratio is a to one ratio. A higher or positive gearing ratio means the company should invest more funds in the business. A negative or lower gearing ratio indicates the company must borrow more funds from the company’s current and future creditors.

Tesco’s gearing ratio for 2012 is 1.95. The ratio is higher than the prior year’s 1.81 fixed asset turnover ratio. The fixed asset turnover ratio analysis shows a negative picture of Tesco, in terms of the company’s gearing ratio analysis. The company should strive to reduce its gearing ratio to a one-to-one standard ratio.

Inventory Turnover Ratio

The ratio shows how many times the company’s inventory had been sold and new inventory was purchased to replace the sold inventories. Another way of generating the ratio is by dividing the total sales amount by the company’s inventory end amount. The traditional way of generating the revenue is dividing the company’s cost of goods sold by the company’s average inventory.

A low turnover ratio shows that the company’s sales amount is unfavorable, triggering an excess of inventory stocks rotting away or gathering spider webs for being unsold for an unusually longer selling time period.

On the other hand, a high ratio shows the company should generate more inventories to satisfy the high demand for the company’s products. Tesco’s inventory turnover ratio for 2012 is 17.54. The ratio is higher than the 2011 accounting period’s 17.50 inventory turnover ratio. The inventory turnover ratio analysis shows a healthy financial picture of Tesco’s 2012 business operations.

Debtor Collection Days’ Ratio

The ratio shows the total amount of the company’s accounts receivable that are outstanding or uncollected as of the company’s balance sheet date. The formula is: debtor collection period = (average debtors/ turnover )* 365. The ratio will help management determine whether to extend the current debtor’s credit terms or revise the credit customers’ credit terms. Tesco’s debtor collection days ratio for 2012 is 15.92. The ratio is higher than the 2011 accounting period’s 13.96 debtor collection days ratio. The debtor collection days’ ratio analysis indicates a favorable picture of Tesco’s 2012 business operations.

Based on the above analysis, the Chief executive officer offers the stockholders a favorable 2012 financial picture of the company. The company was able to generate a favorable profit ratio of 0.08 for 2012. The company was able to generate a favorable net asset turnover ratio of 03.42 for 2012. The company was able to generate a favorable fixed asset turnover ratio of 1.61 for 2012. The company was able to generate an unfavorable gearing profit ratio of 1.95 for 2012.

The company was able to generate a favorable inventory ratio of 17.54 for 2012. The company was able to generate a debtor collection days ratio of 15.92.08 for 2012. The company was able to generate a favorable current ratio of 1.93 for 2012. The company was able to generate a favorable quick ratio of 1.37 for 2012. The company was able to generate a favorable return on equity ratio of 0.16 for 2012.

Recommendations to CEO Needed to Increase the Dividends Received by the Stockholders

There are recommendations needed to increase the dividends received by the stockholders. First, the chief executive officer should focus on improving its current ratio. The focus must include decreasing the company’s unfavorable 2012 accounting period’s 0.10 current ratio decline to a positive amount. The ratio can be improved by increasing the total current asset amounts. The current assets amount includes increasing the company current net sales amount.

Increasing the current 2012 sales amount of £64,539 to a higher amount will increase the company’s 2012 trade and other receivables amounting to £2,647. In addition, the company must reduce its current liabilities amounts. This can be done by reducing the 2012 trade and other payables amount £ 11,234 to a lower amount.

In addition, the chief executive officer should maximize its net assets to increase the company’s 2012 gross profit amounting to £ 5,261. The increase in the company’s operating activities includes focusing on the enhancement of its marketing strategy. The company must increase the quality of its current products and services.

The current and prospective customers will buy more Tesco products and services only if they are satisfied with the quality of the Tesco products and services. Allan Reddy (1994) insists, “To make consumers perceive quality in a proper light, the application of TQMkt is necessary. Therefore, firms should manufacture and market products that consumers perceive as good quality and value.” In addition, the Chief executive officer should price the Tesco products and services at reasonable prices. The customers generally prefer buying products that are reasonably priced, not necessarily lower priced.

The customers are willing to pay for Tesco’s higher prices in exchange for a higher quality product. Tesco must not generate a very high markup for each Tesco product for the competitors are willing to sell the same quality products at a much lower price. If this happens, the current and prospective Tesco customers will shy away from the Tesco stores.

Further, the chief executive officer must place more Tesco stores in other busy communities. The setting up of more stores will precipitate to an increase in the company’s 2012 net profit amounting to £ 2814. Setting up more stores in different communities will translate to more revenues. More people will be encouraged to visit a newly established Tesco Plc store in the neighborhood.

Allan Reddy (1997) proposed, “The characteristics of a firm’s products prompt the firm to identify and target ‘‘high-tech’’ customer segments; to attain sales, profitability, and customer-satisfaction goals, the products must be available for customers to purchase.” The chief executive officer must advertise the company’s products and services to increase its current 2012 revenues.

The company should advertise the many advantages of buying Tesco products and services. The Tesco leadership should allocate available funds for advertising slots in the television, newspaper, and radio media. In turn, more people will be persuaded by the Tesco Plc advertisements to take advantage of the Tesco stores’ promotional sales and other freebies. The customers will surely buy the Tesco products, after the advertisements convince the viewers of the price, quality, and availability of the Tesco products and services within the current and prospective customers’ community.

Evidently, the above recommendations are based on marketing concepts. Gerald Hills (1994) emphasized, “Here is growing evidence that entrepreneurship should be treated as a major conceptual dimension within the marketing discipline. Marketing journals, programs, and associations are structured around:

  1. different marketing functions such as product development and advertising;
  2. types of markets and firms such as consumer and industrial, services, health care marketing, and retailing.

Marketing increases dividends. Further, the chief executive officer must comply with the stockholders’ recommendations. An increase in the company’s sales will increase Tesco’s gross profit. An increase in gross profit will increase Tesco’s net profit. An increase in the net profit increases the retained earnings. An increase in retained earnings increases a possible Tesco dividend declaration. An increase in Tesco’ dividend declaration increases the investors’ dividend income collections.

An increase in the investor’s dividend income collection persuades the investors to invest more funds in the Tesco coffers. On the other hand, a decline in revenues precipitates to lower dividend income distributions. The investors will grimace when their dividend income collections are reduced.

References

Aby, C., 1995. Asset Allocation Techniques and Financial Market Timing. Quorum Books Press, London.

Garrison H., Noreen W., 2003. Managerial Accounting. NewYork: McGraw – Hill.

Hills, G., 1994. Marketing and Entrepreneurship. Quorum Books Press, London.

Horngren T., Sundem L., Stratton, O., 2005.Introduction to Management Accounting. Pearson Education Inc Press, New Jersey.

McCalley, R., 1992. Marketing Channel Development and Management. Quorum Books Press, London.

Murphy, A., 2000. Scientific Investment Analysis. Quorum Books Press, London.

Peter, A., Eddie, M., 2008. Accounting and Finance for Non-specialists. Harlow: Peterson Education, London.

Proctor, T., 2000. Strategic Marketing: An Introduction. Routledge Press, London.

Reddy, A., 1997. The Emerging High -Tech Consumer: A Marketing Profile and Marketing Strategy. Quorum Books Press, London.

Reddy, A., 1994. Total Quality Marketing: The Key to Regaining Market Shares. Quorum Books Press, London.

Tesco Plc., 2012. Tesco Plc. Web.

Appendix

Financial Statement Analysis ( Part 1)

Financial Statement Ratio 2012 2011 Increase (Decrease)
Current Ratio 1.93 2.04 (0.10)
Quick Ratio 1.37 1.48 (0.11)
Return on Equity 0.16 0.16 0

Financial Statement Analysis ( Part 2)

Financial Statement Ratio 2012 2011 Increase (Decrease)
Gross Profit Ratio 0.08 0.08 0
Net Profit Ratio 0.04 0.04 0
Net Asset Turnover 3.42 3.67 (0.24)
Fixed Asset Turnover 1.61 1.73 (0.13)

Financial Statement Analysis ( Part 3)

Financial Statement Ratio 2012 2011 Increase (Decrease)
Gearing Ratio 1.95 1.81 0.14
Inventory Turnover 17.54 17.50 0.04
Debtor Collection Days 15.92 13.96 1.96

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